Fragmented balances below $250,000 held by entities may proliferate. And individuals will check where they have identity numbers and telephone numbers, among other things….
The world is getting smaller. Hidden cash far away will soon be more transparent and seemingly nearer.
On February 13 the OECD unveiled a Common Reporting and Due Diligence Standards for the automatic exchange of tax information between tax authorities worldwide, which was endorsed by the G20 in its communique of February 22-23, 2013, in Sydney.
Presenting the standard, OECD secretary-general Angel Gurría said: “This is a real game changer. Globalization of the world’s financial system has made it increasingly simple for people to make, hold and manage investments outside their country of residence. This new standard on automatic exchange of information will ramp up international tax cooperation, putting governments back on a more even footing as they seek to protect the integrity of their tax systems and fight tax evasion.”
Israel may soon be part of this process. On January 29, 2013, a bill was sent to the Knesset that would enable the government to sign up to such a process.
The OECD Common Reporting Standard:
The CRS would be part of a bilateral or multilateral Competent Authority Agreement for information exchange. This would a reciprocal agreement between governments requiring financial institutions to check their clients and report their accounts according to detailed rules.
The CRS calls on governments to obtain information from their financial institutions and exchange that information automatically with other jurisdictions on an annual basis. It sets out the financial account information to be exchanged, the financial institutions that need to report, the different types of accounts and taxpayers covered, as well as common due diligence procedures to be followed by financial institutions.
The standard draws on previous OECD work on the automatic exchange of information. It aims to be tougher than the European Union Savings Directive. It also reflects many elements of the US Foreign Account Tax Compliance Act.
More than 40 countries have committed to early adoption of the CRS. The Global Forum on Transparency and Exchange of Information for Tax Purposes, hosted by the OECD, brings together 121 jurisdictions worldwide. It was mandated by the G20 to monitor and review implementation of the standard.
The OECD is expected to deliver a detailed commentary on the standard, as well as technical solutions to implement the actual information exchanges, during a meeting of G20 finance ministers in September 2014.
The CRS covers all types of investment income, including interest, dividends, insurance policy pay-outs and similar income, as well as account balances and the proceeds of selling assets.
Not only banks will have to report. Other covered institutions include brokers, collective investment vehicles and insurance companies. They will have to carry out due diligence checks and report virtually all accounts held by individuals, companies and other entities including trusts and foundations.
In the case of existing accounts having a value below $1 million, a reporting financial institution may treat an account holder as resident in the jurisdiction in which the account holder is resident for tax purposes based on documentary evidence of a residence address. Documentary evidence includes a certificate of residence or valid identification issued by a government. In the case of an entity, documentary evidence includes any official documentation naming the entity or any audited financial statement, third party credit report, bankruptcy filing or securities regulator report.
If the reporting financial institution does not rely on documentary evidence of a residential address, it must conduct an electronic search of data it holds and treat the individual as resident in each jurisdiction in which an “indicium” of residence is identified. These indicia are identification, mailing or residence address, telephone number, standing instruction to transfer funds there, power of attorney or signatory authority.
If a “hold mail” or “in-care-of” address is discovered, an additional paper record search is required.
In the case of a high value account above $1m., the electronic and paper record searches must be conducted. Any relationship manager assigned must also be consulted about the holder’s status.
Note that existing entity accounts with a value or balance below US$250,000 need not be reviewed, identified or reported according to the CRS.
For new individual accounts, tax residence would mainly be determined using anti-money laundering/know your customer procedures.
The Israeli information exchange bill: As mentioned, on January 29 draft amendment 200 was sent to the Knesset for debate and enactment. It would enable the government to enter into information exchange agreements, not only tax treaties. An information exchange agreement would be between Israel and another state (or territory elsewhere that is not a state) for tax enforcement purposes only. This would be notwithstanding the Israeli Tax Authority’s obligation to maintain confidentiality. It is not clear if Israel could also sign up to a multilateral agreement.
Comments: The above OECD draft and Knesset draft bill are not yet effective, but look like being so in the next year or two. Governments are minded to enhance tax enforcement rather than raise tax rates. But a game of cat and mouse may still develop. Fragmented balances below $250,000 held by entities may proliferate. And individuals will check where they have identity numbers and telephone numbers, among other things….